DEFICIT SPENDING….The LA Times has a good editorial about the budget today, warning correctly that the deficit for this year is likely to be $400 billion or more and that even President Bush’s allies are starting to get nervous about the whole thing.
As well they should. I’m a moderate deficit hawk myself, and although this is partly for straightforward economic reasons, it’s mostly because of a couple of pretty obvious long term problems that no one ever really wants to fess up to: Social Security and Medicare.
Right now the United States spends just under 30% of its GDP on government services (state, federal, and local). This number is actually fairly low by global standards, but it’s going to go up a lot in the next 30 years. Social Security, which gets a lot of attention, is actually the smaller problem, with estimates suggesting that it will grow from around 4% of GDP today to 8% a few decades from now. Thus, other things being equal, government spending will grow to just over 30%.
Medicare is a whole different animal. Even in its present form it is almost certain to grow from around 2% of GDP to 8%, but in reality it’s much worse than that. Americans currently spend about 15% of GDP on medical services, and I suspect that whether anyone likes it or not, this will become 100% government funded sometime in the next couple of decades. Thus, the real problem is not Medicare growth per se, but the fact that Medicare will be replaced by a more comprehensive health program and overall medical spending by the government will grow from 2% of GDP to around 15% or so. This will put total government spending at around 40% of GDP or a bit more.
It’s wishful thinking to believe that any of this won’t happen. Medical technology is going to force the government into the medical insurance business, and both Social Security and Medicare are too popular to believe that either one is going to be seriously cut back. The votes just aren’t there for that to happen, regardless of whether George Bush or any other Republican would like for it to happen.
Now, 40% of GDP is still not outrageous ? nearly all European countries already have higher government spending than this ? but it’s plenty high. So while there’s no need to panic about domestic spending, we do need to be careful about large spending programs outside of these two areas and we need to accept the fact that taxes are going to have to cover all this stuff. So if you think a $400 billion deficit is high, just wait until the baby boomers start to retire. It’s something George Bush should be thinking about.